Consolidation on the cards: Fitch report

Published:
03 February 2009

In its outlook released today, Fitch Ratings has said that with depressed valuations and smaller players getting realistic about their expectations, some more consolidation in the industry is on the cards.

The report cautioned that smaller players could face issues like fund availability and working capital. “Smaller entities with poor cost structures and ongoing debt-led capex would be more vulnerable during the cement down turn,” the rating agency said.

However, for larger players, the report ruled out any such problems as they have strong balance sheets.

The rating agency has kept a cautious watch on the sector with a stable-to-negative view in 2009. According to the report, the 208-million tonne industry is expected to exhibit volume growth of 6-7 per cent over CY10 and most of CY11.

The report maintained that risks remained in the form of a more subdued demand outlook for CY09 and CY10 and the impact of the ongoing capex plans being implemented in the next two years.

The industry is expected to add another 60-70-million tonne capacity in the next two years.

“These capacity increases bring dual risks of higher leverage and overcapacity for the sector,” said the Fitch report. It further added that the pace of capacity expansion was expected to exceed demand growth, which would potentially take the capacity utilisation below 80 per cent as the impact will be felt mostly in CY09 and CY10.

Higher supply with low demand growth will bring cement prices under pressure during the coming two years. The report said that domestic demand was expected to remain muted.

“The slowdown in demand could increase working capital requirements, although the risks are partly mitigated by the ability to rapidly change capacity utilisation levels,” it said.

In terms of regional demand variations, the report added that the northern region would be resilient with demand supported by the upcoming Commonwealth Games. However, the southern market would see a major fall in demand with maximum new capacities coming in.